Paraguay intends to shrug off the looming emerging markets crunch and launch a new sovereign bond, following the success of last year’s issue of a $1bn 30 year deal.
“We still have some room,” said Carlos Fernández Valdovinos, the governor of the central bank of Paraguay in an interview with Emerging Markets.
“It is going to be more complicated, but the US is not going to increase [its interest rate by] 100bp. They are going to be very careful when they increase the rates.
“We are expecting a small increase at the beginning. We also expect that the market will differentiate very well those who were ants from those who were grasshoppers [during the bonanza years].”
The yield on Paraguay’s bond is almost 800bp lower than that of Brazil’s. “We are in a better shape and pretty much optimistic that there is room [for another bond issue] in the future.”
Fernandez said he had the opportunity to tell the IMF director general Christine Lagarde in Lima that some countries in the region did the right thing during the bonanza years and saved the windfall, while others spent everything.
“In the region you have some ants, and you have some grasshoppers. It is going to be rough for everyone, but it is going to be worse for the grasshoppers,” he said.
Despite Fernandez’s optimism, the small economy of Paraguay, a landlocked country in the heart of South America, is vulnerable to the headwinds. It has strong links with Brazil — Latin America’s largest country is going through a severe recession — and it exports soft commodities to China.
FORECASTS CUT
The turbulent external environment led the central bank to revise its GDP growth forecast to 3.7% on Tuesday, from 4.5% originally.
Average growth of around 4.5% in recent years has nonetheless proved insufficient to curb poverty levels in a country where 25% of the population is poor and 10% extremely poor, according to Word Bank definitions.
“We cannot lose what has made us successful during the last 10 years, which is macrostability,” Fernández said. “This is not a time where you have to be imprudent with fiscal and monetary policies.”
This is in contrast with policies adopted in Brazil, Paraguay’s powerful neighbour, in recent years, for instance.
“It is very hard to live in the neighbourhood in which Brazil is going through very tough times and where Argentina is expected to have a small negative growth next year, but they have managed to minimise this impact by implementing both micro reforms and important macroeconomic policies to attract investment,” said Alejandro Werner, director of the Western hemisphere department at the IMF.
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